In Ecuador, when value is added onto a property that you own or are selling, the seller is required to pay taxes on that added value. This tax, known as the “Capital Gains Tax” is charged directly by the local municipality of the town in which the property is located. So, to pay the taxes on a house in Bahía de Caráquez, one would need to go to the Sucre County Municipality. This tax is only applicable in urban areas, rural areas are exempt, but in Ecuador the majority of towns are considered urban, even if they are small by foreign standards. Canoa, for example, is considered an urban area, and capital gains taxes must be paid on all properties there.
The tax amounts to 10% of the profit the seller is making, or 10% of the difference between the purchase price and the sales price.
Allowed tax deductions under this clause include:
Improvements made by the local government that have improved and raised the value of the property.
Improvements made by the owner of the property.
5% depreciation for each year that has passed since the acquisition of the property.
For these reasons, it’s advisable to have a record of improvements that have been made on your property.
Although by law the seller much pay the taxes, in many situations the buyer and seller have agreed on a joint payment plan to comply with the payment. The legal responsibility, however, will always be on the seller.
As a common practice in Ecuador, many lawyers and realtors advise to include the minimum value of the property in the official deed, which in most of the cases is below the market value, and will benefit the seller in the future.
In his weekly address to the nation, yesterday President Correa suggested that this law will be reformed soon. But for now, it is still unclear how the definitive calculations will be made under a new law. Stay updated with our blog and we’ll make sure to fill you all in!